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OTC derivatives–Collateral optimization
Build, buy, or outsource. How should buy-side firms decide?
With increased collateral requirements potentially changing the way firms trade swaps, it is imperative that buy-side firms inventory their enterprise-wide collateral pool and analyze the cost of their collateral.
There are many challenges that buy-side firms face as they consider ways to optimize their collateral strategy. Should they build internal collateral management capabilities, continue to rely on clearing brokers for collateral services, or completely outsource a function that is not a core competency?
This paper outlines:
- Ways to estimate the cost of collateral
- Definition of a proposed collateral cost index
- Business case for collateral optimization
- Core capabilities for collateral optimization
- Challenges in building collateral optimization capabilities